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Forex: This is the #1 Event Risk This Week

  • Kathy Lien
  • 9 July 2019
 
Daily FX Market Roundup July 8, 2019
 
US dollar bulls remain in control with the greenback extending its gains against all of the major currencies. Friday's non-farm payrolls report sparked a broad based recovery in the greenback. With no US economic reports scheduled for release Monday and Tuesday, the dollar held onto its gains as investors wait for its next catalyst, Federal Reserve Chairman Powell's semi-annual testimony on the economy and monetary policy. There's no question that this is the most important event risk of the week. It could determine the market's appetite for US dollars not just for the next week but for the rest of the month ahead of the July 31st FOMC meeting. Before the jobs report, Fed fund futures were pricing in 75% chance of a quarter point cut this month and 25% of a half point cut. Today, those odds have shifted to 95% chance of July cut and an 80% chance of a second cut by late October.
 
The big question for Fed Chairman Powell and all of the other central bankers scheduled to speak this week is whether a July cut is necessary at all given the latest jobs report. At their last monetary policy meeting, the Fed made it very clear that easing is data dependent. Since then, job growth rebounded sharply but the unemployment rate is up, wage growth is lower, home sales are mixed, confidence is down as manufacturing and service sector activity slowed. So outside of hiring, there's been broad based deterioration in US data. The consumer price report, which is another key measure for the Fed is scheduled for release on Thursday, but chances are Powell has those figures on hand before his testimony.
 
Given the overall tone of the most recent FOMC statement and the amount of time since his last Congressional testimony, we believe that Fed Chair Powell will spend a good portion of his time on Capitol Hill explaining why the central bank believes that the case for a rate cut increased significantly over the past few months. Back in February, the Fed was still thinking about tightening, the labor market was strong and Powell said the outlook for the economy was positive. Last month, the central bank dropped the word patient from their policy statement, said uncertainties increased and saw 8 FOMC members forecast a rate cut this year.
 
July easing seems like a done deal but the price action in the US dollar suggests that forex traders are ill prepared for negative comments from Powell on Wednesday. They hope that the better than expected employment report will push a rate cut to September or give the central bank the confidence to signal that a cut in July is all that the economy needs this year. If Powell's testimony is laced with optimism, USD/JPY will break 109 and EUR/USD will sink well below 1.12. However if the Fed Chair focuses on the risks ahead and spends a large part of his testimony reviewing the slowdown in the economy, we could see USD/JPY u-turn and fall back below 107.50. EUR/USD could squeeze back above 1.13 but the biggest gains should be in the Swiss Franc and New Zealand dollars.
 
The weakest currencies today were the Japanese Yen and Swiss Franc which is no surprise considering that they are the most sensitive to the market's appetite for US dollars. The euro's decline was helped by softer than expected German industrial production. The most resilient currency was the New Zealand dollar, which held steady after Friday's slide. Looking ahead there are no major economic reports scheduled for release in the next 24 hours so we do not expect any big moves before Powell's testimony.
 
 
 

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About the Author
Kathy Lien
Kathy Lien is Managing Director and Founding Partner of BKForex. Having graduated New York University’s Stern School of Business at the age of 18, Ms. Kathy Lien has more than 13 years of experience in the financial markets with a specific focus on currencies

Ms. Kathy Lien is Managing Director of FX Strategy for BK Asset Management and Co-Founder of BKForex.com. Her career started at JPMorgan Chase where she worked on the interbank FX trading desk making markets in foreign exchange and later in the cross markets proprietary trading group where she traded FX spot, options, interest rate derivatives, bonds, equities, and futures.

In 2003, Kathy joined FXCM and started DailyFX.com, a leading online foreign exchange research portal. As Chief Strategist, she managed a team of analysts dedicated to providing research and commentary on the foreign exchange market.

In 2008, Kathy joined Global Futures & Forex Ltd as Director of Currency Research where she provided research and analysis to clients and managed a global foreign exchange analysis team. As an expert on G20 currencies, Kathy is often quoted in the Wall Street Journal, Reuters, Bloomberg, Marketwatch, Associated Press, AAP, UK Telegraph, Sydney Morning Herald and other leading news publications.

She also appears regularly on CNBC’s US, Asia and Europe and on Sky Business. Kathy is an internationally published author of the bestselling book Day Trading and Swing Trading the Currency Market as well as The Little Book of Currency Trading and Millionaire Traders: How Everyday People Beat Wall Street at its Own Game all published through Wiley. Kathy’s extensive experience in developing trading strategies using cross markets analysis and her edge in predicting economic surprises serve key components of BK’s analytic techniques.